Implications of the Discreteness of Observed Stock Prices


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Stock prices on the organized exchanges are restricted to be divisible by ⅛. Therefore, the “true” price usually differs from the observed price. This paper examines the biases resulting from the discreteness of observed stock prices. It is shown that the natural estimators of the variance and all of the higher order moments of the rate of returns are biased. An approximate set of correction factors is derived and a procedure is outlined to show how the correction can be made. The natural estimators of the “beta” and of the variance of the market portfolio, on the other hand, are “nearly” unbiased. 1985 The American Finance Association

Original languageEnglish
Pages (from-to)135-153
Number of pages19
JournalJournal of Finance
Issue number1
StatePublished - Mar 1985


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